The stock market has been kind to growth-hunting investors recently. The tech-heavy Nasdaq Composite (NASDAQINDEX: ^IXIC) market index has gained more than 32% over the last 12 months, thanks to an improving economy making stock buyers comfortable with potentially risky ideas again.
But some excellent growth stocks didn’t punch a ticket to that freight train. This creates an imbalance between fantastic long-term business prospects and modest share prices. In turn, savvy investors get a tempting buy-in opportunity.
Let me show you why I’m especially entranced by the wide-open buying windows I see for media-streaming platform expert Roku (NASDAQ: ROKU) and restaurant management tools provider Toast (NYSE: TOST) right now.
Toast’s share price has drifted lower for a long time, while Roku took a steep dive last week. Either way, I think it’s high time to invest in these great growth stocks before the market comes to its senses and sends their share prices skyward again.
Roku: down 3% in 12 months
Roku looks downright spring-loaded for robust gains. Meanwhile, bearish investors seem to insist on jumping aboard this future rocket after it takes off, adding more pressure to an already low stock price in the process.
That’s cool. I don’t mind buying more shares on the cheap, kicking the big payoff down the road again.
The bears often point to bustling competition in the smart TV market, led by longtime Roku customer Walmart agreeing to acquire Roku-less TV maker Vizio for $2.3 billion. They also complain about slow revenue growth and an unprofitable hardware business. In one example, analyst firm Oppenheimer says it is staying on the sidelines with a “neutral” rating until Roku can deliver sustained growth in device sales in the “high-teens” percentage range.
But strong competition is nothing new for Roku, which holds a dominant share of global connected TV sales despite challenges from Alphabet‘s Google TV and Chromecast, Amazon‘s Fire TV, the Apple TV line, and in-house software solutions from leading TV makers Samsung and LG Electronics. If that horde of highly competent and deep-pocketed rivals can’t compete effectively with Roku, I don’t see much of a threat from Walmart’s Vizio purchase, either. And regulators are not guaranteed to approve the deal, either.
The stalled top-line growth looks poised for a rebound in the second half of 2024 and an even stronger continuation next year. Most of Roku’s revenue comes from ad sales, and that restrained market has suffered from limited ad-buying budgets since the inflation crisis started in 2021. Now that budget dollars are trickling back into the picture, more than two years’ worth of underpromoted products and services are calling out for attention. That’s why I expect a sudden swing, not a slow crawl, back to healthy digital ad sales.
And those profit-sapping hardware sales should actually be seen as a marketing expense. Keeping prices low when everyone else plays along with the inflation trend by raising their software fees and device price tags has helped Roku grow its user base dramatically in recent years.
The company reported 60 million active accounts and 19.5 billion hours of streaming activity in the fourth quarter of 2021. Two years later, Roku sported 80 million accounts and 29.1 billion streaming hours. That’s 33% more users, engaging in 49% more streaming hours. That’s how you build a huge user base that should command higher ad rates in the long term.
So I see absolutely nothing wrong with Roku’s current and future results. Profits can wait while the company gets busy building a truly great business platform for the decades ahead. This stock is an absolute steal, and you don’t want to be left empty-handed when those double-digit growth rates come along to light a fuse under Roku’s shares.
Toast: up 7% in 12 months
Here’s another underappreciated growth story.
Toast sells a cloud-based software platform that helps restaurant owners, café managers, food truck vendors, and other food service businesses run and manage their operations. From processing payments and publishing menus to tracking ingredient inventory and designing data-based marketing campaigns, the system covers many functions normally handled by software from different vendors (or notes scribbled on the breakroom’s whiteboard).
If that sounds like a winning idea to you, we’re on the same page. Many restaurant owners agree, and Toast’s services are rolling out across the country like wildfire. Fourth-quarter revenue rose 35% year over year, bottom-line losses shrank from $99 million to $36 million, and free cash flow landed at $92 million. The company sports 106,000 customer locations, a 34% jump from the year-ago quarter.
And just like Roku, Toast uses low-priced hardware systems as a loss-leader marketing tactic. The idea is, once you try the management system, you’ll never want to leave. Just get a foot in the door. Those unprofitable credit card readers and order-taking tablets should pay off in the long run.
“We are well on our way to becoming the technology platform of choice for the entire restaurant industry,” CEO Aman Narang said on the earnings call with anaylsts. “Even in our most penetrated markets where we have over 30% market share, we are still gaining share at a healthy clip.”
Yet, Toast’s stock trades nearly 70% below the all-time high of 2021, and shares are valued at just 2.9 times sales. That would be a reasonable ratio for some of Toast’s clients, since restaurants tend to run with notoriously low margins and high growth is reserved for an elite group of newer names.
This is a software company on a high-octane growth run. Double-digit price-to-sales ratios are common in this category, even for companies with weak or nonexistent cash flows.
I’ll admit that Toast’s management has made a few unfortunate mistakes so far, such as introducing an unpopular fee for payment processing. But the company also canceled that fee quickly, showing an ability to stay flexible and listen to customer concerns.
So I understand if you’d rather watch Toast for a while to make sure the company isn’t forming a habit of problematic public relations moments. At the same time, I can’t take my eyes off the low share price and slim price-to-sales ratio — and the Toast name keeps popping up whenever I grab some takeout or take the family out to eat. Keep an eye out for Toast-branded credit card readers to see for yourself.
This growth rocket deserves better, and I highly recommend taking a chance on this innovator before the rocket ship takes off.
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John Mackey, former CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Anders Bylund has positions in Alphabet, Amazon, and Roku. The Motley Fool has positions in and recommends Alphabet, Amazon, Apple, Roku, Toast, and Walmart. The Motley Fool has a disclosure policy.
If I Were You, I’d Buy These 2 Stocks Before They Skyrocket was originally published by The Motley Fool
Source: finance.yahoo.com